Consumer agency to target prepaid cards

May 23, 2012

The new federal consumer watchdog agency is considering drafting new rules governing transparency and safety in the rapidly growing market for prepaid cards.

Consumer Financial Protection Bureau Director Richard Cordray said the cards have fewer regulatory protections than bank accounts and debit cards. The agency said it will focus rule-making on three key areas: disclosure of fees and terms, liability for unauthorized transactions and niche product features, such as overdrawing an account. The agency is holding a field hearing on the cards Wednesday in North Carolina.

“The people who use prepaid cards are, in many instances, the most vulnerable among us,” Cordray said. “All consumers need, and deserve, products which are safe and whose costs and risks are clear upfront.”

The rules would apply specifically to prepaid cards that can be reloaded and used at an array of locations. Many consumers are using these cards as replacements for traditional checking accounts. According to a recent focus group convened by the Pew Health Group, consumers said the cards help them avoid costly bank overdraft fees and are a useful budgeting tool. Generally, consumers can only spend the money they have loaded onto the card.

But the Pew focus group found that consumers were concerned about the number of fees associated with prepaid cards. They include charges to buy the card, reload money, withdraw money from an ATM and call customer service.

The CFPB said there is no industry-wide standard on disclosures, making it hard for consumers to comparison shop. In addition, some cards offer features allowing customers to overdraw their accounts or build their credit. The agency is seeking feedback on the costs, benefits and consumer-protection issues associated with those features.

Terry Maher, general counsel at the Network Branded Prepaid Card Association, said the trade group supports transparent disclosures. Several of its members have been working with advocacy groups on test forms, he said.

Maher said the group is also open to requiring prepaid card providers that offer overdraft to comply with the same regulations for those fees as banks. But he said it “would be a mistake” to ban the product all together.

“We’re in favor of consumers being able to choose the product that’s right for them after they get clear and transparent disclosures,” Maher said.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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